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Why don't in-house contractor prequalification systems work?

Answer
By Pete Wiggins | Last updated: April 12, 2022

There is one big reason why in-house contractor prequalification systems fail to meet expectations. They are simply too time-consuming, resource-intensive, and costly to maintain.

An in-house prequalification system also introduces unnecessary risks. Prequalification processes that aren't airtight can lead to working with contractors who are spotty on compliance - and that can lead to safety incidents, project delays, and hefty fines.

When In-House Prequalification Systems Can Work for You

To be fair, there are limited cases where an in-house system can work perfectly fine.

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Small companies that deal with a very limited number of contractors in one single location can often successfully manage the prequalification process on their own.

Likewise with large companies that are willing to invest the amount of resources needed to maintain a high-quality system.

The challenge is that companies can quickly outgrow their in-house system, making it difficult for them grow, adapt, and scale.

The fact is, many companies see the burden of maintaining a prequalification department as too expensive for the benefits gained. They usually fall back on simply setting standards that contractors should meet and passing the enforcement buck onto project managers, the safety department, or purchasing teams.

The Complex Prequalification Ecosystem

Suppose you run a company that has jobsites in more than one location. In that case, setting standards for your contractors would likely be the responsibility of an interdepartmental team. Each of the departments will bring their own concerns to the table, and hopefully the final draft of the standards will reflect their input:

  • Risk Management: Determining which type of insurance coverage is required and how much of it is acceptable
  • Safety Department: Seeks a track record of safe work, usually determind by the contractor's Experience Modification Rate (EMR), Recordable Incident Rate (RIR), and Days Away, Restricted, or Transferred (DART)
    • The safety department will also want to know whether OSHA has cited the company and why
    • As well as take a close look at their safety programs, policies, procedures, and training
  • Project Management: Wants to know the contractor's capabilities and their ability to deliver on a specific project
  • FInance: Whether the contractor has the financial capability to deliver the work promised
  • Legal: Ensure that the contractor has agreed to an agreement or contract that protects and indemnifies the company
  • Purchasing: Coordinating all the standards to find a contractor who can deliver on them at an acceptable price

Why Do These Systems Fail?

The challenge companies face when running their own in-house prequalification systems is usually around collecting the information.

Because each department is asking for information that is relevant to their department, the tasks are typically assigned as a part-time task to someone in that department. Because of the complexity of managing larger operations, different company locations might operate almost autonomously. Delegating these tasks across various departments, involving locations that use different systems, results in disconnected information silos.

Without a centralized database to gather all this information, it's up to the project manager and the purchasing team to determine whether a contractor meets the standards.

Without a well-coordinated system in place, however, verifying compliance with corporate requires can be hit or miss. Add employee turnover, lack of experience, and the fact that these are part-time efforts to the mix and you've got yourself a recipe for failure.

It's not that anyone involved doesn't care - they almost certainly do. It's that the system is far too dependant on having all the pieces falling into place in the right way and at the right time. And unfortunately, the probability of that failing is relatively high.

What about a prequalification system that is centralized in one department with an in-house database?

That certainly gives you a higher probability of success. However, there is another challenge with this type of system.

Because of the diverse nature of the information collected as part of the prequalification process, the team must either be very well-trained or rely on people who have specialized knowledge. There need to be people involved who have the ability to, for example, review certificates of insurance or evaluate the reasons a contractor's EMR is high.

There are also technological obstacles to keep in mind.

Unless the in-house system automatically reminds contractors to update their expiring documentation, human errors and omissions are inevitable.

The ability to store documents electronically for quick access is also essential. I have seen my share of unecessary trouble and wasted time due to poor document handling. In one case, a risk manager spent 60 days searching for a signed master purchase agreement that had been improperly filed - and that document's indemnity clause was critical to his comany's pending litigation.

Is It Worth It?

On the surface, developing and managing an internal prequalification system doesn't seem like a difficult endeavor.

Audits of these systems paint a far less optimistic picture. Because of the challenges discussed above, compliance is less than 50%.

Given the potential for litigation, it's important to ask one simple question when considering an in-house system: can you afford the risk?

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Written by Pete Wiggins | Principal

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Pete Wiggins worked for over twenty years helping to develop and lead a network of 90+ remodeling franchises serving 30 states, the U.K., Canada and Japan. Trading as Archadeck®, it was the leading organization in its market segment and received recognition as among Remodeling magazine’s Top 50, Entrepreneur magazine’s Top 100 home-based franchises, and Inc. magazine’ 500 fastest growing private companies.

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